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Comment by sliverstorm | Hacker News Reader

Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!?

It's not directly relevant to me as I don't have options, but I suddenly feel like I don't understand stock again.

Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man.

They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.

That's exactly right.

"Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now."

I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.

There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.

Interesting. The email I got from their stock administrator read:

> As a result of a transaction in 2001 that created CompanyName Acquisition Corporation, now named CompanyName, Inc., all equity interests in the predecessor companies were extinguished.

I guess I'll talk to a lawyer. They were sold for $3.5B, so that might be an interesting up-side.

Wow, I hope you write about what you find out. The situations like that I've heard of, and admittedly that's mostly from following the press, is that the old shares are traded for shares in the new entity. If minority owners aren't protected, it's a crack in the foundation of silicon valley.

But is this 'legal' even if the employee didn't sign anything to change the previously agreed upon arrangement (options)??

As with every legal question the answer is "sometimes." But typically, yes it is legal. See the comment below that basically allows the "extinguishing" of options under certain restructuring.

The most recent way I found out was the offer letter that spoke of my grant said "on board approval." A year later, they had never gotten board approval. I was long gone, but another year later and my old colleagues had finally gotten their grant. Preventing board approval for a long time is a nice way to extend the 1-year cliff. Even better, my email to the controller and then to the CFO was completely ignored. That is what really set off my spidey-sense. IMHO, if the officers aren't willing to acknowledge my questions in email, they have legal reasons for not having anything recorded.

Oh, and they were recently acquired by BAE for a lot of money. The officers made a killing, but my friends made around 4-figures. I have no idea what they did to get board approval but it feels like they rejiggered things to dilute everyone else.

The path to liquidity is not always straight up and to the right. Some funding rounds can drastically revalue prior shares through reverse splits. This can make your 1% stake magically turn into a 0.05% stake in a single funding round. Even if they don't reverse split, funding rounds issue new shares which is dilutive if you do not also get an additional grant. Once you leave a company, your precious few shares get diluted and reverse split with all the funding rounds between your departure and the liquidity (IPO or acquisition) event.

So how do you protect yourself against this? Is there something you can put in the initial contract to prevent reverse splitting in the future?

There are so many ways to screw you, that your best protection is a management team you trust.

I'd argue that the best protection is the advice of a lawyer, and not to mix trust with financial matters. History is strewn with tales of people who trusted other people with their money.

> I'd argue that the best protection is the advice of a lawyer

That advice turns into: "You could fight this and possibly win, but it would take a year and it would cost more than you'd get back." I get what you are saying. You definitely can't really "trust" anyone, but there are so many ways to legally screw you that I'm not sure you can trust protection using a lawyer.

Does that just happen with stock options or normal stocks as well? It would seem that if there are 100 shares and I have 1, then it should be worth 1% of the company no matter how successful it becomes. I can understand how options might be subject to tinkering, but if stocks are as well then the whole thing sounds like a racket.

I just mean that the idea of dilution suggests to me that the original company has been dissolved and reconstituted somehow. That sounds like something seriously in need of regulation...

>> "then the whole thing sounds like a racket."

Yup, that's it exactly.

This doesn't sound like what happened in the case here, but dilution can happen due to reasonable funding rounds. If you own 1 share out of 100 and then the company decides to go to some investors and raise $10 million, they might give those investors 50 shares, meaning the company now has 150 shares, the new investors own a third of the company, and you own 2/3 of a percent of the company instead of 1 percent. Where this gets messy is if shenanigans are used to dilute particular shareholders (e.g., after some event you now own 0.001% and someone else's portion is unchanged) or other such things.

Edit: I should add that even publicly traded companies do this, issuing more shares and diluting current shareholders to raise capital.

One common example is the case of employees who have left and a company that is acquired. The acquiring company often has an incentive to take part of the bucket of cash and stock allocated to the purchase and shift it to retention bonuses, screwing former employees who exercised their options.

I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).

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